On August 26, through the release of FIL-84-2008, the FDIC urged insured depository institutions that rely primarily on liabilitybased or off-balance sheet funding sources – brokered deposits, securitizations, and borrowings – to develop contingency funding plans (“CFPs”). The practical teaching is that FDIC-insured institutions should look primarily to core deposits and the maintenance of saleable securities and other highly liquid assets as the principal sources of liquidity.
A CFP is expected to incorporate or address four sets of issues: (i) cash flow assumptions that are reasonable for the institution; (ii) strategies for handling particular problem-funding situations; (iii) internal restrictions on the use of brokered and high-rate deposits; and (iv) other internal liquidity risk tolerances. The board of directors is not necessarily required to approve the entire CFP, but it is required to approve the risk limits under (iv), and the FDIC expects it to be informed of particular funding shortfalls.
Since the collapse of the credit markets about 13 months ago, many institutions have relied increasingly on governmentsponsored liquidity sources – FHLB advances, borrowings from the Federal Reserve discount window, and sales of conforming loans to Fannie Mae and Freddie Mac. Although each of these sources has a legitimate role to play in a liquidity strategy, there are attendant risks. The clear direction of FIL-84-2008 is away from these liabilities and off-balance sheet arrangements and toward strengthening retail deposits and maintaining on-balance sheet assets that can be sold easily if additional liquidity is needed.